Financial Reporting & Analysis
Chapter 17 Solutions
Statement of Cash Flows
Exercises
Exercises
E17-1. Determining cash flows from operations
Using the indirect method, cash flow from operations is computed below:
Net income
Add:
Equity in investee loss
Decrease in prepaid expenses
Depreciation expense
Increase in salaries payable
$280,000
$20,000
7,000
13,000
8,000
48,000
Subtract:
Amortization of premium on
bonds
payable
Increase in inventory
Increase in accounts receivable
Decrease in accounts payable
(10,000)
(21,000)
(15,000)
(2,000)
(48,000)
$280,000
Cash flow from operations
17-1
E17-2. Determining cash flows from operations
(AICPA adapted)
Lino’s net cash from operating activities is calculated below:
Net income
Increase in accounts receivable1
Decrease in prepaid rent
Increase in accounts payable
Cash flow from operations
1
$150,000
(5,800)
4,200
3,000
$151,400
The increase in accounts receivable is net of the allowance for doubtful accounts:
Beginning accounts receivable
Less: Beginning allowance for doubtful accounts
Beginning net accounts receivable
$23,000
(800 )
$22,200
Ending accounts receivable
Less: Ending allowance for doubtful accounts
Ending net accounts receivable
$29,000
(1,000)
$28,000
Increase in net accounts receivable:
Ending net accounts receivable
Beginning net accounts receivable
Increase in net accounts receivable
$28,000
(22,200 )
$ 5,800
E17-3. Cash flows from operations
(AICPA adapted)
Requirement 1:
Calculate accrual basis net income for December:
Sales revenue
Cost of goods sold (70% of sales)
Gross profit (30% of sales)
Selling, general, and administrative expenses
Fixed portion =
$35,000
Variable portion = 15% ´ $350,000 =
52,500
Net income (accrual basis)
17-2
$350,000
(245,000)
105,000
(87,500)
$17,500
Requirement 2:
Adjust accrual basis income to obtain cash flows from operations:
Accrual basis net income
- Increase in gross trade accounts receivable*
- Increase in inventory
+ Charge for uncollectible accounts (1% ´ $350,000)
+ Depreciation expense included in S, G&A
Cash flows from operating activities
$17,500
(13,500)
(5,000)
3,500
20,000
$22,500
* ($10,500 + $3000 write-off of uncollectable accounts receivable)
E17-4. Analysis of changes in balance sheet accounts
(AICPA adapted)
Requirement 1:
Determining depreciation on machinery for 2001:
Step 1: Determine the amount of accumulated depreciation on equipment sold
during 2001:
Cost of machine sold (given)
Less: Accumulated depreciation
Book value of equipment sold
Less: Cash received from sale
Loss on sale (given)
$40,000
?
?
26,000
$4,000
Working backwards, the book value of equipment sold is $30,000 and the
accumulated depreciation is $10,000.
Step 2: Analyze the accumulated depreciation account to determine the
amount credited to this account when depreciation expense was
recorded for the year:
Accumulated Depreciation
$102,000 Beginning balance
Accumulated depreciation on
$10,000 ?
Depreciation expense for the year
equipment sold (see above)
$120,000 Ending balance
17-3
From the T-account analysis, we can determine that depreciation expense for
the year is $28,000.
Requirement 2:
To determine machinery purchases, the solutions approach is to set up a
T-account for machinery and solve for the missing debit for equipment
purchases:
Beginning balance
Purchases
Ending balance
Machinery
$250,000
? $40,000
$320,000
Cost of equipment sold
The T-account can by analyzed to determine that 2001 machinery purchases
totaled $110,000.
E17-5. Cash flows from investing and financing activities
(AICPA adapted)
Requirement 1:
Net cash flows from operating activities are computed as follows:
Net income
+ Depreciation
- Gain on sale of equipment
Cash flows from operating activities
$300,000
52,000
(5,000)
$347,000
Requirement 2:
Below is the computation for cash flow from investing activities:
Sale of equipment1
Purchase of equipment2
Cash outflow from investing activities
1
2
$18,000
(20,000)
($ 2,000)
Computation of cash from sale of equipment:
Cost of equipment
Accumulated depreciation
Book value of equipment sold
Gain on sale of equipment
Amount of cash received in exchange for equipment
$25,000
(12,000 )
13,000
5,000
$18,000
Computation of cash paid for equipment:
Cost of new equipment
Less: amount paid with note payable
Cash paid for equipment
$50,000
(30,000 )
$20,000
17-4
E17-6. Cash flows from investing and financing activities
(AICPA adapted)
Requirement 1:
Cash flow from investing activities:
Sale of equipment
Purchase of A.S., Inc., bonds
Net cash used in investing activities
$ 10,000
(180,000)
($170,000)
Requirement 2:
Cash flow from financing activities:
Dividends paid
Proceeds from sale of treasury stock
Net cash provided by financing activities
($38,000)
75,000
$37,000
E17-7. Cash flows from investing activities
(AICPA adapted)
Purchase of stock in Maybel
Sale of investment in Rate Motors
Purchase of 4-year certificate of deposit
Net cash used in investing activities
($26,000)
35,000
(50,000)
($41,000)
E17-8. Cash flows from investing and financing activities
(AICPA adapted)
Requirement 1:
Cash flows from investing activities:
Sale of investment
Purchase of equipment
Purchase of real estate
Net cash used in investing activities
$500,000
(125,000)
(550,000)
($175,000)
Requirement 2:
Cash flows from financing activities:
Dividends paid
Issue of common stock
Bank loan for real estate purchase
Paid toward bank loan
Net cash used in financing activities
17-5
($600,000)
250,000
550,000
(450,000)
($250,000)
E17-9. Determining operating cash flows
(AICPA adapted)
Net Income
Increase in investment in Videogold, Inc.
Increase in deferred income tax liability
Decrease in premium on bonds payable
Net cash provided by operating activities
$150,000
(5,500)
1,800
(1,400)
$144,900
E17-10. Determining operating, investing, and financing cash flows
(AICPA adapted)
Requirement 1:
Net cash provided by operating activities:
Net income
Gain on sale of long-term investment
Increase in inventory
Depreciation expense
Decrease in accounts payable and accrued liabilities
Net cash provided by operating activities
$790,000
(35,000)
(80,000)
250,000
(5,000)
$920,000
Requirement 2:
Net cash used in investing activities:
Purchase of short-term investments
($ 300,000)
Sale of long-term investments
135,000
Sale of plant assets
350,000
Purchase of plant assets (see T-account which follows) (1,190,000)
Net cash used in investing activities
($1,005,000)
Cost of equipment acquired
Cost of plant assets purchased
Net increase
Plant Assets
$110,000 $600,000 Cost of building sold
X
$700,000
$110,000 + X - $600,000 = $700,000
X = $1,190,000
17-6
Requirement 3:
Net cash provided by financing activities:
Payment of dividends ($500,000 - $160,000)
Issuance of short-term debt
Issuance of common stock (10,000 ´ $22)
Net cash provided by financing activities
Check: (Not required)
Cash provided by operating activities
Cash used in investing activities
Cash provided by financing activities
Increase in cash and cash equivalents
17-7
($340,000)
325,000
220,000
$205,000
$920,000
(1,005,000)
205,000
$120,000
Financial Reporting & Analysis
Chapter 17 Solutions
Statement of Cash Flows
Problems
Problems
P17-1. Determining cash provided (used) by operating, investing and
financing activities
(AICPA adapted)
Requirement 1:
Cash flows provided by operating activities:
Net Income
$690,000
Increase in inventory
Increase in accounts payable
Gain on sale of investment1
Goodwill amortization2
Depreciation expense3
($80,000)
105,000
(35,000)
10,000
250,000
250,000
$940,000
Cash flows from operations
1
Gain on sale of investment is determined as follows:
Proceeds from sale of investments (given)
Less: Book value of investment sold
($300,000 - $200,000)
Gain on sale of investment
$135,000
(100,000 )
$ 35,000
2
Goodwill amortized is equal to change in the goodwill account for the year =
$100,000 - $90,000 = $10,000
3
Depreciation expense recorded in year 2001 is determined from an analysis of the
accumulated depreciation T-account.
17-8
Accumulated Depreciation
$450,000 Beginning balance
Accumulated depreciation
X
Depreciation expense for year
on equipment sold*
$250,000
$450,000 Ending balance
*Cost of equipment sold =
Less: Carrying value
Accumulated depreciation
$400,000
(150,000 )
$250,000
Solving for depreciation expense amount X in T-account
$450,000 + X - $250,000 = $450,000
X = $250,000 = Depreciation expense for year 2001
Requirement 2:
Cash flows used in investing activities:
Sale of equipment
Sale of long-term investment
Purchase of plant assets 4
Purchase of short-term investments
Cash outflows from investing activities
$ 150,000
135,000
(1,100,000)
(300,000)
($1,115,000)
4
Cash payments for plant assets is obtained from an analysis of the plant assets
T-account:
Plant Assets
Beginning balance
Purchase of additional assets
$1,000,000
X
Ending balance
$1,700,000
Solve for X:
$1,000,000 + X - $400,000 = $1,700,000
X = $1,100,000 = Purchase of plant assets
17-9
$400,000
Cost of equipment sold
Requirement 3:
Cash flows provided by financing activities:
Dividends paid
Sale of common stock5
Short-term debt
Cash flows from financing activities
5
($240,000)
220,000
325,000
$305,000
10,000 shares @ $22/sh. = $220,000
Proof: (Not required)
Cash from operating activities
Cash used for investing activities
Cash from financing activities
Net increase in cash
17-10
$940,000
(1,115,000)
305,000
$130,000
P17-2. Comparing direct and indirect methods of determining cash flows from
operations
(CMA adapted)
Requirement 1:
The statement of cash flows for Spoke Company, for the year ended
May 31, 2001, using the direct method is presented below:
Spoke Company
Statement of Cash Flows
For the Year Ended May 31, 2001
Cash Flows from Operating Activities:
Cash received from customers1
Cash paid
to suppliers2
to employees3
for other expenses4
for interest5
for income taxes6
Net cash provided by operating activities
$1,235,250
$664,000
276,850
10,150
73,000
43,000
1,067,000
$168,250
Cash Flows from Investing Activities:
Purchase of plant assets
Cash Flows from Financing Activities:
Cash received from common stock issue
Cash paid
for dividends
to retire bonds payable
Net cash used for financing activities
Net increase in cash
Cash, May 31, 2000
Cash, May 31, 2001
(40,000)
$40,000
(115,000)
(30,000)
(105,000)
$
23,250
20,000
43,250
Note 1: Schedule of noncash investing and financing activities.
Issuance of common stock for plant assets
17-11
$50,000
Supporting calculations:
1
2
3
4
5
6
Collections from customers:
Sales
Less: Increase in accounts receivable
Cash collected from customers
$1,255,250
(20,000)
$1,235,250
Cash paid to suppliers:
Cost of merchandise sold
Less: Decrease in merchandise inventory
Increase in accounts payable
Cash paid to suppliers
$712,000
(40,000)
(8,000)
$664,000
Cash paid to employees:
Salary expense
Add: Decrease in salaries payable
Cash paid to employees
$252,100
24,750
$276,850
Cash paid for other expenses:
Other expense
Add: Increase in prepaid expenses
Cash paid for other expenses
$8,150
2,000
$10,150
Cash paid for interest:
Interest expense
Less: Increase in interest payable
Cash paid for interest
$75,000
(2,000)
$73,000
Cash paid for income taxes:
Income tax expense (given)
$43,000
17-12
Requirement 2:
The calculation of the cash flow from operating activities for Spoke Company,
for the year ended May 31, 2001, using the indirect method, follows:
Spoke Company
Statement of Cash Flows
For the Year Ended May 31, 2001
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to cash
Provided from operations:
Depreciation expense
$25,000
Decrease in merchandise inventory
40,000
Increases in:
Accounts payable
8,000
Interest payable
2,000
Accounts receivable
(20,000)
Prepaid expenses
(2,000)
Decrease in salaries payable
(24,750)
Net cash provided by operating activities
$140,000
28,250
$168,250
Requirement 3:
Both the direct method and the indirect method for reporting cash flows from
operating activities are acceptable in preparing a statement of cash flows
according to SFAS 95; however, the FASB encourages the use of the direct
method. Under the direct method, the statement of cash flows reports the
major classes of cash receipts and cash disbursements and discloses
more information; this may be the statement’s principal advantage. Under
the indirect method, net income on the accrual basis is adjusted to the cash
basis by adding or deducting noncash items included in net income, thereby
providing a useful link between the statement of cash flows and the income
statement and balance sheet.
17-13
P17-3. Determining amounts reported on statement of cash flows
(AICPA adapted)
Requirement 1:
Cash collections from customers can be determined by examining the
accounts receivable T-account, shown below:
Beginning balance
Sales
Ending balance
Accounts Receivable
$24,000
155,000 X
$34,000
Cash collections
We can find the amount of cash collections from customers by solving for X.
$24,000 + $155,000 - X = $34,000; X = $24,000 + $155,000 - $34,000;
X = $145,000
Cash collections from customers would appear in cash flows from operating
activities as $145,000.
Requirement 2:
Cash payments for purchase of property, plant, and equipment are calculated
as follows:
Beginning balance
Acquired from
bond refinancing
Cash purchases
Ending balance
Property, Plant, & Equipment
$247,000 $40,000 Sale of equipment
20,000
X
$277,000
Solving for X: $247,000 + $20,000 + X - $40,000 = $277,000;
X = $50,000
Purchases of PP&E would be classified as cash flows from investing
activities.
17-14
Requirement 3:
Proceeds from sale of equipment can be found by first looking at the
accumulated depreciation account:
Accumulated Depreciation
$167,000 Beginning balance
33,000
Depreciation on equipment sold
Depreciation expense
X
$178,000 Ending balance
By solving for X , we can find the depreciation on the equipment that was sold.
$167,000 + $33,000 - X = $178,000; $167,000 + $33,000 - $178,000 = X
X = $22,000
Since we know the accumulated depreciation on the equipment sold, we can
determine its carrying value or book value as follows:
Cost of equipment
Accumulated depreciation on equipment
Carrying value of equipment sold
$40,000
(22,000)
$18,000
Now that we know the carrying value of the equipment that was sold, we can
determine the proceeds from sale of equipment.
Carrying value (book value) of equipment sold
Gain on sale of equipment
Proceeds from sale of equipment
$18,000
13,000
$31,000
This amount would be classified as cash flows from investing activities.
17-15
Requirement 4:
To find dividends paid, we need to first determine dividends declared by
analyzing retained earnings:
Dividends declared
Retained Earnings
$91,000
28,000
X
$104,000
Beginning balance
Net income
Ending balance
Solving for X, we get:
$91,000 + $28,000 - X = $104,000
X = $91,000 + $28,000 - $104,000
X = $15,000 = dividends declared
The amount of cash dividends paid can be determined by T-account analysis
of dividends payable:
Cash dividends paid
Dividends Payable
$5,000
Beginning balance
15,000
Dividends declared
X
$8,000
Ending balance
Solving for X, we get:
X = $5,000 + $15,000 - $8,000
X = $12,000 = Cash dividends paid
$12,000 should be reported on the statement of cash flows as a financing
activity.
17-16
Requirement 5:
Redemption of bonds payable can be found by using the bonds payable
T-account:
Redemption of bonds
Bonds Payable
$46,000
20,000
X
$49,000
Beginning balance
Bonds issued in 2001
Ending balance
Solve for X:
$46,000 + $20,000 - X = $49,000; $46,000 + $20,000 - $49,000 = X
X = $17,000
Redemption of bonds payable is $17,000 reported under cash flows from
financing activities.
P17-4. Determining amounts reported on statement of cash flows
(AICPA adapted)
Requirement 1:
Cash collections from customers can be determined by examining the
accounts receivable T-account below:
Beginning balance
Sales
Ending balance
Accounts Receivable
$30,000
538,800
X
Cash collections
$33,000
We can find cash collections from customers by solving for X.
$30,000 + $538,800 - X = $33,000; $30,000 + $538,800 - $33,000 = X
X = $535,800
Cash collections from customers are $535,800.
17-17
Requirement 2:
To solve for cash paid for goods sold, we must first determine how much was
purchased. We can do this by first looking at the inventory account to
determine total purchases for the period:
Beginning balance
Purchases
Ending balance
Inventory
$47,000
X
$250,000
$31,000
Cost of goods sold
To find purchases, solve for X.
$47,000 + X - $250,000 = $31,000
X = $250,000 + $31,000 - $47,000
X = $234,000
Next, to find out how much cash was paid on accounts payable, we plug the
purchases number into the accounts payable T-account and solve for cash
payments on account:
Cash paid
Accounts Payable
$17,500
234,000
X
$25,000
Beginning balance
Purchases
Ending balance
Again, we can solve for X.
$17,500 + $234,000 - X = $25,000
X = $17,500 + $234,000 - $25,000
X = $226,500
Cash paid for goods to be sold is $226,500.
Requirement 3:
We can determine cash paid for interest as follows:
Interest expense (2001)
Less: Amortization of bond discount in 2001
Cash paid for interest
17-18
$4,300
(500)
$3,800
Requirement 4:
Cash paid for income taxes:
Income taxes paid
Income Taxes Payable
$27,100
Beginning balance
20,400
Income tax expense
X
$21,000
Ending balance
Solving for X:
$27,100 + $20,400 - X = $21,000
X = $27,100 + $20,400 - $21,000
X = $26,500
Next, we must take into account deferred income taxes.
Ending balance
Beginning balance
Change in deferred income taxes payable
$ 5,300
(4,600)
$ 700
Income taxes paid
Change in deferred income taxes
Cash paid for income taxes
$26,500
(700)
$25,800
Requirement 5:
Cash paid for selling expenses:
One third of the depreciation expense has been allocated to selling
expenses. This is a noncash expense and should be subtracted from selling
expenses to find the answer.
Selling expenses
Depreciation allocated to selling1
Cash paid for selling expenses
1
$141,500
(500)
$141,000
Depreciation expense calculated:
Ending balance in accumulated depreciation
Beginning balance in accumulated depreciation
Depreciation expense for 2001
One third allocated to selling expense
17-19
$16,500
(15,000 )
$ 1,500
$1,500/3
= $500
P17-5. Preparation and analysis of cash flow statement
Requirement 1:
Statement of cash flows under indirect method:
Global Trading Company
Statement of Cash Flows
For the Year Ended December 31, 2001
Cash flow from operations
Net loss for the year
+ Depreciation expense
+ Goodwill written off
+ Decrease in net accounts receivable
+ Decrease in inventory
+ Decrease in prepaid insurance
+ Increase in accounts payable
+ Increase in salaries payable
Cash flow from operations
($279,500)
50,000
70,000
240,000
170,000
20,000
78,000
6,000
$354,500
Cash flow from financing activities
Repayment of bank loan
Dividends paid1
Cash flow from financing activities
($307,500)
(35,000)
($342,500)
Net increase in cash
$ 12,000
1
Calculation of dividends
Beginning retained earnings
- Net loss for the year
- Ending retained earnings
= Dividends paid
$320,000
(279,500)
(5,500)
$35,000
17-20
Requirement 2:
Assessment of financial performance of Global:
· Net loss for the year is an indication of poor operating performance.
· Positive cash flow may be misleading since cash flow does not do a good
job of matching revenues and expenses.
· Goodwill written off is from an acquisition made last year indicating that the
potential benefits from the acquisition have been exhausted.
· Decrease in accounts receivable coupled with a decrease in inventory is
an indication of decreasing demand. A mere change in the collection
policy cannot explain the reduction in inventory.
· Increase in accounts payable could indicate that the company is not
paying off its suppliers because of the constraint on bank loan.
· The repayment of the bank loan probably is not voluntary but enforced by
the debt covenants.
· Payment of dividends when the company is incurring substantial losses is
not a sign of prudent financial management and drains the cash reserves
of the company.
· Ratio of accumulated depreciation to property, plant, and equipment of 0.9
(last year was 0.8) implies that, on average, the life of the fixed assets is
one year and the company needs to invest in these assets immediately.
17-21
Requirement 3:
Determination of bad debts written off can be obtained from T-account
analysis of the allowance for doubtful accounts:
Accounts written off
Allowance for Doubtful Accounts
$30,000
Beginning balance
55,000
Bad debt expense
X
$20,000
Ending balance
Solve for X:
$30,000 + $55,000 - X = $20,000
X = $65,000 = accounts written off in 2001.
Determination of credit sales for the year can be obtained from T-account
analysis of accounts receivable:
Accounts Receivable
Beginning balance $300,000
Sales on account
Ending balance
$65,000
X 1,250,000
$50,000
Bad debts written off (see preceding page)
Collections on account
Solve for X:
$300,000 + X - $65,000 - $1,250,000 = $50,000
X = $1,065,000 = sales on account.
Requirement 4:
Effect of omission of inventory purchase:
Income Statement
No effect. (Purchases are understated, and ending inventory is understated
by equal amounts. Thus, net effect on income is zero.)
Statement of Cash Flows
No effect. (Purchase was on account for credit.)
Balance Sheet
The balance sheet balances, but the year-end amounts for both accounts
payable and inventory are understated by $35,000.
17-22
P17-6. Preparation of cash flow statement and balance sheet
Requirement 1:
Statement of cash flows under the direct method:
JKI Advertising Agencies
Statement of Cash Flows for the Year Ended 12/31/01
Direct Method
Operating Activities:
Cash collected from clients
Rent collected
Salaries paid
Cash paid for insurance
Cash paid for interest
Cash paid for customer lawsuit
Cash paid for taxes
Cash flows from operations
$215,000
50,000
(130,000)
(12,000)
(9,000)
(32,000)
(31,000)
$_51,000
Investing Activities:
Proceeds from sale of land
Purchase of office equipment
Cash flows from investing activities
$150,000
(20,000)
$130,000
Financing Activities:
Borrowing from TownBank
Repayment of building loan
Issuance of capital stock
Dividends declared & paid
Cash flow from financing activities
$50,000
(85,000)
35,000
(18,000)
($18,000)
Increase in cash for the year
$163,000
17-23
Requirement 2:
December 31, 2000 balance sheet
The figures for the 12/31/00 balance sheet can be attained by T-account
analysis of the relevant accounts:
Balance as of 12/31/00
Advertising revenue
Balance as of 12/31/01
Accounts Receivable
X
$250,000 $215,000
Cash collected from clients
$80,000
Solve for X:
$80,000 = X + $250,000 - $215,000
X = $45,000
Balance as of 12/31/00
Cash paid for insurance
Balance as of 12/31/01
Prepaid Insurance
X
$12,000 $12,000
$3,000
Insurance expense
Solve for X:
$3,000 = X + $12,000 - $12,000
X = $3,000
Land
Balance as of 12/31/00
X
$150,000
Balance as of 12/31/01
$0
Solve for X:
$0 = X - $150,000
X = $150,000
17-24
Sale of land
(cash received = book value)
Accumulated Depreciation–Building
X
Balance as of 12/31/00
$20,000 Depreciation expense - building
$380,000
Balance as of 12/31/01
Solve for X:
X = $380,000 - $20,000
X = $360,000
Balance as of 12/31/00
Purchase of office
equipment
Balance as of 12/31/01
Office Equipment
X
$20,000
$80,000
Solve for X:
X = $80,000 - $20,000
X = $60,000
Accumulated Depreciation–Office Equipment
X
Balance as of 12/31/00
$8,000
Depreciation expense–
office equipment
$39,000
Balance as of 12/31/01
Solve for X:
X = $39,000 - $8,000
X = $31,000
Salaries paid
Salaries Payable
X
$130,000 $126,000
$7,000
Solve for X:
X = $130,000 - $126,000 + $7,000
X = $11,000
17-25
Balance as of 12/31/00
Salaries expense
Balance as of 12/31/01
Cash paid for interest
Interest Payable
X
$9,000 $10,000
$3,500
Balance as of 12/31/00
Interest expense
Balance as of 12/31/01
Solve for X:
X + $10,000 - $9,000 = $3,500
X = $2,500
Liability for Customer Lawsuit
X
Cash paid for customer lawsuit
$32,000
$0
Balance as of 12/31/00
Balance as of 12/31/01
Solve for X:
X - $32,000 = 0
X = $32,000
Rent revenue
Rent Received in Advance
X
Balance as of 12/31/00
$36,000 $50,000
Rent collected
$14,000
Balance as of 12/31/01
Solve for X:
X = $50,000 - $36,000 - $14,000
X = $0
Bonus Payable
X
$25,200
$25,200
Balance as of 12/31/00
Employee incentive bonus
Balance as of 12/31/01
Solve for X:
X + $25,200 = $25,200
X = $0
Cash paid for taxes
Taxes Payable
X
$31,000 $33,920
$2,920
Solve for X:
$2,920 = X + $33,920 - $31,000
X = $0
17-26
Balance as of 12/31/00
Income tax expense
Balance as of 12/31/01
Borrowing from TownBank
X
Balance as of 12/31/00
$50,000 Borrowing from TownBank
$50,000 Balance as of 12/31/01
Solve for X:
X + $50,000 = $50,000
X = $0
Building Loan
X
Repayment of building loan
$85,000
$35,000
Balance as of 12/31/00
Balance as of 12/31/01
Solve for X:
$35,000 = X - $85,000
X = $120,000
Capital Stock
X
$35,000
$135,000
Balance as of 12/31/00
Issuance of capital stock
Balance as of 12/31/01
Solve for X:
$135,000 = X + $35,000
X = $100,000
Dividends declared & paid
Retained Earnings
X
$18,000
$50,880
$264,380
Solve for X:
$264,380 = X + $50,880 - $18,000
X = $231,500
17-27
Balance as of 12/31/00
Net income
Balance as of 12/31/01
JKI Advertising Agencies
Balance Sheet as of 12/31/00
Cash
Accounts receivable
Prepaid insurance
Land
Building
Less: Accumulated depreciation
Office equipment
Less: Accumulated depreciation
Total assets
Salaries payable
Interest payable
Liability for customer lawsuit
Rent received in advance
Bonus payable
Taxes payable
Borrowing from TownBank
Building loan
Capital stock
Retained earnings
Total of liabilities and equities
17-28
2000
$ 30,000
45,000
3,000
150,000
600,000
(360,000)
60,000
(31,000)
$497,000
$ 11,000
2,500
32,000
120,000
100,000
231,500
$497,000
Requirement 3:
Operating section of cash flow statement under indirect approach:
JKI Advertising Agencies
Statement of Cash Flows for the Year Ended 12/31/01
Net income
+ Depreciation expense–building
+ Depreciation expense–office equipment
- Increase in accounts receivable
- Decrease in salaries payable
+ Increase in interest payable
- Decrease in liability for customer lawsuit
+ Increase in rent received in advance
+ Increase in bonus payable
+ Increase in taxes payable
Cash flow from operations
$50,880
20,000
8,000
(35,000)
(4,000)
1,000
(32,000)
14,000
25,200
2,920
$51,000
Requirement 4:
Evaluation of statements:
a) Depreciation is a noncash charge, and therefore, by adding depreciation to
net income we, in effect, eliminate this noncash item from the net income
figure.
b) Note that while depreciation expense is subtracted in determining net
income, the cost of long-lived assets is not subtracted from the cash flow
from operations. Consequently, net income over the entire life of a company
would be equal to the sum of cash flow from operations and cash flow from
investing.
Requirement 5:
Effect of revised bonus formula on operating cash flows:
Cash flow from operations for the year 2001 would remain unchanged since
this is merely an accrual entry (i.e., liability increases and retained earnings
decreases). However, when the incentive bonus is paid in cash, say, in 2002,
it will show up as operating outflow.
17-29
The operating section of the cash flow statement under the indirect approach
demonstrates the main point. The three italicized items change when the
incentive bonus is increased from 20% to 25%. However, because this is an
accrual entry, the net effect of these three on the cash flow from operations is
zero. Since the net income is different and since it is the beginning point for
calculating the cash flow from operations, it might be tempting to say that the
cash flow from operations will be lower.
JKI Advertising Agencies
Statement of Cash Flows for the Year Ended 12/31/01
Net income (see below)
+ Depreciation expense–building
+ Depreciation expense–office equipment
- Increase in accounts receivable
- Decrease in salaries payable
+ Increase in interest payable
- Decrease in liability for customer lawsuit
+ Increase in rent received in advance
+ Increase in bonus payable (see below)
+ Increase in taxes payable (see below)
Cash flow from operations
$47,100
20,000
8,000
(35,000)
(4,000)
1,000
(32,000)
14,000
31,500
400
$51,000
Supporting computations for revised cash flow statement:
Revised bonus expense (.25 x 126,000) =
Previous bonus expense
Before-tax increase in bonus expense
Times (1 - .4)1
After-tax decrease to net income
Previous net income
Revised net income
1
$31,500
25,200
$ 6,300
.6
$ 3,780
50,880
$47,100
Tax rate is Income tax expense / Income before taxes = $33,920 / $84,800 = 40%
17-30
T-account to support change in taxes payable:
Cash paid for taxes
Taxes Payable
0
$31,000 $31,400
$400
Revised tax expense:
Before-tax increase in bonus expense
Times tax savings
Decrease in income tax expense
Previous income tax expense
Revised income tax expense
Balance as of 12/31/00
Income tax expense
Balance as of 12/31/01
$ 6,300
.4
$ 2,520
33,920
$31,400
P17-7. Reconciliation of changes in balance sheet accounts with amounts
reported in cash flows statement
Requirement 1:
Reconciling changes in accounts receivable reported on the cash flow
statement with change in receivables shown on the balance sheet:
Briggs & Stratton Corp.
For Briggs & Stratton, the decrease in receivables of $2,384,000 reported in
the Year 2 cash flow statement is equal to the change in the net receivables
as reported in the balance sheet ($122,597,000 - $124,981,000).
Ramsay Health Care, Inc.
Here, the decrease in receivables of $3,677,000 from the balance sheet (i.e.,
$23,019,000–$26,696,000) is different from the increase in the patient
accounts receivables of $2,169,000 reported in the cash flow statement.
Learning Objective
The purpose of this exercise is to present the two different reporting
practices commonly adopted by companies and illustrate how both
approaches lead to the same cash flow numbers.
17-31
Requirement 2:
Explanation of different reporting practices with respect to receivables:
It is instructive to discuss initially the mechanics of converting sales or
service revenue to cash collected from customers. We reconstruct the Taccounts of Ramsay Health Care to figure out the cash collected from
customers. Although one can arbitrarily choose any sales number to get the
intuition, let us pick the actual Year 2 revenue of $137,002,000 (not provided
in the problem).
We first need to calculate the amount of receivables written off during the
year from an analysis of the "Allowance for doubtful accounts" T-account.
Bad debts written off
Allowance for Doubtful Accounts
$4,955,000
Beginning balance
5,846,000
Provision for bad debts
X
$3,925,000
Ending balance
Solve for X:
$4,955,000 + $5,846,000 - X = $3,925,000
X = $6,876,000
Plugging this number into the "Patient accounts receivable" account allows
us to solve for cash collected:
Beginning balance
Revenue
Ending balance
Patient Accounts Receivable
$31,651,000
137,002,000 $6,876,000 Bad debts written off
(from previous page)
X
Cash collected
$26,944,000
Solve for X:
$31,651,000 + $137,002,000 - $6,876,000 - X = $26,944,000
X = $134,833,000
The figure for cash collected can be determined using either one of the two
reporting practices. For instance, if Ramsay had followed Briggs & Stratton’s
reporting practice, the adjustment for change in receivables would be as
follows:
17-32
Ramsay Health Care, Inc., and Subsidiaries
Using Briggs & Stratton’s Reporting Strategy
Revenue
$137,002,000
- Provision for doubtful accounts
(5,846,000)
+ Decrease in Net A/R
3,677,000
Cash collected from customers
$134,833,000
Obviously, revenue less the provision for doubtful accounts is already
reflected in the net income figure. It is important to understand that the net
accounts receivable balance (gross A/R minus allowance for doubtful
accounts) is affected by revenue as well as provision for doubtful accounts.
Consequently, to figure out the cash collected from customers, we should
jointly consider revenue, provision for doubtful accounts and change in
receivables. The intuition behind the above table can be clarified by
examining the reporting practice adopted by Ramsay Health Care, which
follows.
Ramsay Health Care, Inc. and Subsidiaries
Revenue
$137,002,000
- Provision for doubtful accounts
(5,846,000)
Adjustments to reconcile net income to cash
flows
+ Provision for doubtful accounts
5,846,000
+ Decrease in gross A/R*
$4,707,000
- Bad debts written off*
(6,876,000)
- Decrease in patient accounts receivable
Cash collected from customers
(2,169,000)
$134,833,000
Note: The two * items were not separately reported by Ramsay Health
Care. Instead, it reported the sum of the two items, i.e., ($2,169,000) =
$4,707,000 - $6,876,000
17-33
Under this reporting practice, firms first add back the provision for doubtful
accounts which, in essence, eliminates the noncash accrual expense. The
remainder of the adjustments (revenue + decrease in gross accounts
receivable - bad debts written off) represent all the items in the T-account for
patient accounts receivable (i.e., gross accounts receivable) except for cash
collected from customers which is being solved.
Another way to provide the intuition is to focus on the two possible reasons
for the decrease (in this example) in accounts receivable, i.e., (1) cash
collections and (2) bad debts written off. By adding the decrease in gross
accounts receivable, we attribute the entire decrease to cash collections.
However, by subtracting the bad debts written off, we adjust for any
decreases in accounts receivable that merely represent bad debts.
17-34
P17-8. Preparation of cash flow statement–indirect method
(AICPA adapted)
Cash flow for 2001 using the indirect method:
Bergen Corporation
Statement of Cash Flows
For the Year Ended December 31, 2001
Operating Activities:
Net income
Adjustments for noncash items:
+Depreciation
- Amortization of bond premium
+Increase in deferred income taxes payable
- Gain on sale of securities
- Gain on sale of equipment
- Increase in accounts receivable, net
- Increase in inventories
- Decrease in accounts payable and
accrued expenses
Net cash flow provided by operations
Investing Activities:
Sale of securities
Sale of equipment
Purchase of equipment
Net cash outflow from investing activities
Financing Activities:
Proceeds from long-term note payable
Cash dividends
Payment of tax assessment from prior period
Payment under capital lease
Net cash flow provided by financing activities
Net increase in cash
Beginning balance in cash
Ending balance in cash
17-35
$253,000
149,000
(2,000)
15,000
(20,000)
(5,000)
(90,000)
(115,000)
(63,000)
122,000
95,000
33,000
(392,000)
(264,000)
450,000
(30,000)
(20,000)
(25,000)
375,000
233,000
308,000
$541,000
P17-9. Preparing an income statement from statement of cash flows and
comparative balance sheets
Kang-Iyer Financial Consultants
Statement of Cash Flows for the Year Ended 12/31/01
Cash Flow from Operations:
Cash collected from customers
Cash paid to employees
Cash paid for interest
Cash flow from operations
$250,000
(70,000)
(50,000)
$130,000
Cash Flow from Investing:
Land purchased
Building acquired
Cash flow from investing
($200,000)
(500,000)
($700,000)
Cash Flow from Financing:
Dividends paid
Additional borrowings from village bank
Proceeds from share issue (capital contributions)
Cash flow from financing
($ 15,000)
500,000
45,000
$530,000
Change in cash
Beginning cash balance
Ending cash balance
($ 40,000)
70,000
$ 30,000
17-36
Kang-Iyer Financial Consultants
Income Statement for the Year Ended 12/31/01
Consulting revenue
$356,500
Less: Expenses
Depreciation–building
Salaries expense
Interest expense
Bad debts expense
Rent expense
Net income
Beginning balance
Consulting revenue
Ending balance
$10,000
150,000
65,000
48,000
30,000
303,000
$ 53,500
Accounts Receivable
$15,000
X
$41,500 Bad debts written off
250,000 Cash collected
$80,000
Solve for X:
$80,000 = $15,000 + X - $41,500 - $250,000
X = $356,500
Allowance for Doubtful Accounts
$1,500
Beginning balance
Bad debts written off $41,500
X
Provision for doubtful accounts
$8,000
Ending balance
Solve for X:
$8,000 = $1,500 + X - $41,500
X = $48,000
17-37
Salaries Payable
$20,000
$70,000
X
$100,000
Cash paid
Beginning balance
Salaries expense
Ending balance
Solve for X:
$100,000 = $20,000 + X - $70,000
X = $150,000
Interest Payable
$5,000
$50,000
X
$20,000
Cash paid
Beginning balance
Interest expense
Ending balance
Solve for X:
$20,000 = $5,000 + X - $50,000
X = $65,000
Beginning balance
Cash paid
Ending balance
Prepaid Rent
$30,000
X
0
$0
Rent expense
Solve for X:
$0 = $30,000 + $0 - X
X = $30,000
Accumulated Depreciation–Building
$0
Beginning balance
X
Depreciation expense
$10,000
Ending balance
Solve for X:
$10,000 = $0 + X
X = $10,000
17-38
P17-10. Determining components of cash flow statement
(AICPA adapted)
Requirements 1–3:
Cash provided by operating, investing, and financing activities:
Best Corporation
Statement of Cash Flows
For the Year Ended December 31, 2001
Cash Flow from Operating Activities:
Net income
$700,000
Add (Subtract):
Depreciation expense
$130,000
Increase in accounts receivable
(280,000)
Increase in inventory
(290,000)
Increase in accounts payable
390,000
Increase in accrued expenses
170,000
Loss on sale of fixtures
10,000 130,000
Cash provided by operating activities
830,000
Cash Flow from Investing Activities:
Sale of fixtures
Purchase of fixtures
Cash used in investing activities
20,000
(630,000)
Cash Flow from Financing Activities:
Issuance of common stock
Cash paid for dividends1
Cash provided by financing activities
125,000
(85,000)
Net change in cash balance
1
Dividends declared
- Increase in dividends payable
Cash dividends paid
17-39
(610,000)
40,000
$260,000
$125,000
(40,000)
$ 85,000
Fair market value of Best Corporation’s common stock.
The debit to retained earnings for the fair market value of the stock dividend
can be found by an analysis of the retained earnings T-account:
Dividends declared
Stock dividend
Retained Earnings
$330,000
$125,000
700,000
X
$630,000
Beginning balance
Net income
Ending balance
Solve for X:
$630,000 = $330,000 + $700,000 - $125,000 - X
X = $275,000 = fair market value of stock dividend
On a per-share basis, Best’s common stock has a value of
$275,000/20,000 shares = $13.75
17-40
P17-11. Analysis of statement of cash flows
Requirement 1:
Statement of cash flows for the year ended 12-31-2001:
Cavalier Toy Stores
Statement of Cash Flows
For the Year Ended December 31, 2001
Cash Flow from Operating Activities:
Net loss
Add:
Depreciation expense
$75,000
Decrease in accounts receivable 405,000
Decrease in prepaid insurance
30,000
Decrease in inventory
500,000
Increase in salaries payable
20,000
Increase in accounts payable
188,000
Less:
Decrease in interest payable
Cash flow from operating activities
($250,000)
1,218,000
(8,000)
$960,000
Cash Flow from Investing Activities:
Purchase of building
Cash flow from investing activities
(900,000)
($900,000)
Cash Flow from Financing Activities:
Loan from Thrifty Bank
Dividends
Decrease in dividends payable
Cash paid for dividends
Cash flow from financing activities
140,000
(300,000)
(50,000)
($350,000)
($210,000)
Net change in cash balance
($150,000)
17-41
Requirement 2:
(a)Bad debts written off during the year:
Beginning balance in allowance for doubtful accounts $ 30,000
Add: Bad debt expense
100,000
Less: Ending balance in allowance for doubtful accounts (10,000)
Bad debts written off during the year
$ 120,000
(b)Cash collected from customers:
Beginning balance in accounts receivable
Add: Credit sales
Less: Bad debts written off
Less: Ending balance in accounts receivable
Cash collected from customers
$ 525,000
1,500,000
(120,000)
(100,000)
$1,805,000
(c) Purchases made during the year:
Beginning inventory
Add: Purchases
Less: Ending inventory
Cost of goods sold
Purchases
$550,000
?
(50,000)
1,200,000
$700,000
(d)Cash paid to the suppliers for purchases of inventory:
Beginning balance in accounts payable
Purchases
Less: Ending balance in accounts payable
Cash paid for inventory purchases
$ 64,000
700,000
(252,000)
$512,000
(e)Cash paid for insurance:
Beginning balance in prepaid insurance
Add: Cash paid for insurance
Less: Ending balance in prepaid insurance
Insurance expense
Cash paid for insurance
17-42
$35,000
?
(5,000)
30,000
$0
Requirement 3:
Thrifty Bank should be concerned about renewing the loan or increasing the
credit limit for the following reasons:
(a)Depletion of accounts receivable and inventory and increase in accounts
payable to boost cash flow from operations–this cannot be done every
year to increase cash flow from operations.
(b)Use of working capital (accounts receivable and inventory and increase in
accounts payable) to finance building–a nonproductive asset
(c) Very large dividend in a loss year.
(d)Decreasing gross margins (from letter) from competitive pressures.
(e)Net loss.
17-43
P17-12. Preparation of cash flow statement
(AICPA adapted)
Farrell Corporation
Statement of Cash Flows
For the Year Ended December 31, 2001
Operating Activities:
Net income
Add (Deduct):
Depreciation
Amortization of goodwill
Loss on sale of equipment
Equity in net income of Hall, Inc.
Increase in deferred income tax payable
Decrease in accounts receivable
Increase in inventories
Increase in accounts payable and
accrued expenses
Net cash provided by operating activities
$141,000
$53,000
4,000
5,000
(13,000)
11,000
10,000
(118,000)
41,000
Investing Activities:
Sale of equipment
Purchase of equipment
Net cash provided from investing activities
19,000
(63,000)
Financing Activities:
Sale of common stock
Sale of treasury stock
Cash dividends paid
Net cash provided by financing activities
23,000
25,000
(43,000)
(7,000)
134,000
(44,000)
5,000
Simultaneous Financing and Investing Activity
Not Affecting Cash:
Purchase of land with long-term note
150,000
Net increase in cash
Beginning balance in cash account
Ending balance in cash account
17-44
$ 95,000
180,000
$275,000
P17-13. Statement of cash flows—indirect method
(AICPA adapted)
Omega Corporation
Statement of Cash Flows
For the Year Ended December 31, 2001
Cash Flow from Operating Activities:
Net income
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation1
$150,000
2
Gain on sale of equipment
(5,000)
3
Undistributed earnings of Belle Co.
(30,000)
Changes in assets and liabilities:
Decrease in accounts receivable
40,000
Increase in inventories
(135,000)
Increase in accounts payable
60,000
Decrease in income taxes payable
(20,000)
Net cash provided by operating activities
Cash Flows from Investing Activities:
Proceeds from sale of equipment
Loan to Chase Co.
Principal payment of loan receivable
Net cash used in investing activities
40,000
(300,000)
30,000
Cash Flows from Financing Activities:
Dividends paid
Net cash used in financing activities
(90,000)
Net increase in cash
Cash at beginning of year
Cash at end of year
$360,000
60,000
420,000
(230,000)
(90,000)
$100,000
700,000
$800,000
17-45
1
2
3
Depreciation
Net increase in accumulated depreciation
for the year ended December 31, 2001
Accumulated depreciation on equipment sold:
Cost
Carrying value
Depreciation for 2001
Gain on sale of equipment
Proceeds
Carrying value
Gain
$125,000
$60,000
(35,000)
25,000
$150,000
$40,000
35,000
$ 5,000
Undistributed earnings of Belle Co.
Belle’s net income for 2001
Omega’s ownership
Undistributed earnings of Belle Co.
17-46
$120,000
25%
$ 30,000
Financial Reporting & Analysis
Chapter 17 Solutions
Statement of Cash Flows
Cases
Cases
C17-1. Q-Mart Retail Stores, Inc. (KR): Analysis of statement of cash flow
Requirement 1:
Q-Mart Retail Stores, Inc.
Statement of Cash Flows for the Year Ended 12/31/01
Cash Flow from Operating Activities:
Net income
+ Depreciation expense–building
+ Depreciation expense–computer
Increase in net accounts receivable
Increase in inventory
Increase in prepaid insurance
Decrease in salaries payable
Decrease in accounts payable
+ Increase in income tax currently payable
Cash flow from operations
$ 81,250
25,000
35,000
(361,000)
(275,000)
(20,000)
(32,000)
(5,000)
7,000
($544,750)
Cash Flow from Investing Activities:
Additions to building
Purchase of computer equipment
Cash flow from investing activities
($250,000)
(140,000)
($390,000)
Cash Flow from Financing Activities:
Borrowing from Upstate Bank
Proceeds from stock issuance
Dividends paid
Cash flow from financing activities
$200,000
390,000
(40,000)1
$550,000
Change in cash balance
+ Beginning cash balance
Ending cash balance
(384,750)
504,750
$120,000
17-47
1
Calculation of dividends:
Beginning balance of retained earnings
Add: Net income
Less: Ending balance of retained earnings
Dividends paid
$341,750
81,250
-383,000
$ 40,000
Requirement 2:
Bad debts written off = beginning balance of allowance for doubtful accounts
+ bad debts expense - ending balance of allowance for doubtful accounts
= $11,000 + $50,000 - $50,000
= $11,000
Requirement 3:
Cash collected = beginning balance of accounts receivable + sales - bad
debts written off (from above) - ending balance in accounts receivable
= $100,000 + $1,500,000 - $11,000 - $500,000
= $1,089,000
Requirement 4:
Purchases of inventory = ending balance of inventory + cost of goods sold beginning balance of inventory
= $350,000 + $1,050,000 - $75,000
= $1,325,000
Requirement 5:
Cash paid = beginning balance of accounts payable + purchases (from
above) - ending balance of accounts payable
= $17,000 + $1,325,000 - $12,000
= $1,330,000
Requirement 6:
Cash flow from operations is the main reason for the decline. The increase in
accounts receivable is a good signal if it is commensurate with growth in
sales. On the other hand, it could suggest collection problems as well as
inadequate provision for doubtful accounts. There is also an increase in
inventory. This could be positive news if the buildup is in anticipation of
demand. Again, this could be negative if the obsolete items have not been
written down. The investment in property, plant, and equipment is financed by
loan and equity.
17-48
Additional information required:
·
·
·
·
What is the sales increase over last year?
By how much have the purchases increased over the last year?
Why haven’t the suppliers extended credit with the rise in purchases?
What is the change in net income over last year?
Requirement 7:
If the sales had been stopped, the net income would be lowered, and,
therefore, the cash flow from operations would decline ultimately. What is
necessary is to reduce the average collection period for accounts receivable
and speed up the collection process.
Requirement 8:
Depreciation is a noncash item and is added back to the net income.
Therefore, even if higher depreciation had been provided, the amount that is
added to the net income would have been originally subtracted from
revenues to determine net income and, consequently, would not affect the
cash flow.
Requirement 9:
Matching is an important feature of accrual accounting that is lacking in the
cash flow statements. However, accruals are subject to greater managerial
discretion. See answer to “reasons for decline” as an example of jointly
analyzing the two statements.
17-49
C17-2. Vulcan Corporation: Understanding cash flow statements
Requirement 1:
Vulcan’s net income can be determined by adding the unrealized loss on
investments to total comprehensive income reported for the year ended
October 31, 2000.
Vulcan Corporation
Computation of Net Income
Year Ended October 31, 2000
($ in thousands)
Comprehensive income as reported $ 336
Plus: Unrealized loss on investments
classified as available-for-sale
286
Net income
$ 622
17-50
Requirement 2:
In order to prepare Vulcan’s income statement at October 31, 2000, the
following items must be determined: sales, cost of goods sold, depreciation
expense, general & administrative expense, interest expense and tax
expense. These items can readily be determined from the information
provided (see below—Calculation of revenues and expenses).
Vulcan Corporation
Statement of Income and Comprehensive Income
Year Ended
($ in thousands)
October 31, 2000
Net sales
$40,455
Cost of goods sold
28,598
Gross profit
11,857
General and administrative expense
8,690
Depreciation expense
1,322
Operating income
1,845
Interest expense
888
Income before income taxes
957
Income tax expense
335
Net income
622
Other comprehensive loss
Unrealized loss on investments
classified as available-for-sale
(286)
Comprehensive income
$ 336
17-51
Calculation of income statement revenues and expenses:
Note all amounts are in thousands
Sales
Cash collected from customers
Plus increase in accounts receivable
Net sales
$ 37,378
3,077
$ 40,455
Cost of goods sold
Cash paid to suppliers
Plus decrease in inventories
Plus increase in accounts payable
Cost of goods sold
$ 26,884
333
1,381
$ 28,598
General and administrative expense
Cash paid for general and administrative expense
Plus increase in accrued general and
administrative expense
General and administrative expense
Depreciation expense
Plant, property & equipment
at October 31, 2000
Plant, property & equipment (PP&E)
at October 31, 1999
Decrease in PP&E
Decrease in PP&E comprised of
Equipment purchases
Equipment retirements at net book value
Depreciation expense (plug number)
Decrease in PP&E
Interest expense
Cash paid for interest expense
Plus increase in interest payable
Interest expense
$
8,002
$
688
8,690
$ 10,707
11,523
(816)
$
$
$
Income tax expense
Cash paid for income taxes
Plus increase in deferred taxes
Income tax expense
$
$
17-52
854
(348)
(1,322)
(816)
810
78
888
74
261
335
Requirement 3:
Vulcan’s net cash provided by operating activities, using the indirect method,
would be $1,608,000.
Vulcan Corporation
Cash Flow From Operating Activities
Year Ended October 31, 2000
($ in thousands)
Net income
$ 622
Adjustments to net income:
Depreciation
$ 1,322
Deferred taxes
261
1,583
2,205
Changes in current assets and liabilities:
Increase in accounts receivable
(3,077)
Decrease in inventories
333
Increase in accounts payable
1,381
Increase in interest payable
78
Increase in accrued general and
administrative expense
688
(597)
Net cash provided by operating activities
$ 1,608
17-53
C17-3. Fillio Corporation (KR): Comprehensive statement of cash flows
Requirement 1:
Fillio Corporation
Statement of Cash Flows for the Year Ended 12/31/01
Operating Activities:
Net loss
($11,403)
+ Dividend in kind
162
+ Depreciation
8,330
+ Loss on write-off of machinery & equipment
227
+ Non-cash portion of settlement with Sitco
1,775
+ Bad debt expense
238
+ Decrease in gross accounts receivable
13,782
- Bad debts written off
(315)
+ Decrease in income tax receivable
6,731
+ Decrease in inventory
22,459
- Increase in prepaid expenses
(835)
- Decrease in trade accounts payable
(22,725)
- Decrease in accrued payroll
(1,259)
+ Increase in accrued interest
33
- Decrease in other payables
(19)
- Decrease in accrued settlement
($2,432)
- Decrease in long-term accrued settlement (1,500)
(3,932)
- Increase in deferred financing costs
+ Increase in owners’ equity for these costs
Cash flow from operations
Investing Activities:
Purchase of property, plant, and equipment
Cash flow from investing activities
(413)
400
(13)
$13,236
(1,085)
($1,085)
(continued)
17-54
Financing Activities:
Increase in preferred stock
- Dividend in kind
- Noncash settlement with Sitco
Repayment of principal on IDR bonds
Retired revolving line of credit
Retired equipment line of credit
Borrowing on new revolving line of credit
Borrowing on new equipment line of credit
Repayment of notes secured by equipment
2001 bank loan secured by real property
(i) Borrowing
(ii) Repayment
2001 equipment loan at 9%
(i) Borrowing
(ii) Repayment
Increase in common stock + paid-in capital
- Non-cash stock for financing charges
Cash flow from financing activities
Change in cash
Beginning cash balance
Ending cash balance
$1,937
(162)
(1,775)
($ 320)
(19,973)
(15,762)
21,006
6,000
(3,982)
3,000
(1,500)
1,500
200
(97)
103
526
(400)
126
($11,302)
$
17-55
849
48
897
Details of selected T-accounts:
Accumulated Depreciation
$18,630
Beginning balance
8,330
Depreciation expense
Acc. dep. on asset written off
$633
$26,327
Ending balance
Beginning balance
Purchase of PP&E
Ending balance
1
Property, Plant and Equipment
$55,574
$8601 Original cost of asset written off
1,085
$55,799
Book value of asset written off
+ Acc dep. on asset written off
= Original cost of asset written off
Bad debts written off
Beginning balance
$227
633
$860
Allowance for Doubtful Accounts
$608
Beginning balance
238
Bad debt expense
$315
$531
Ending balance
Accounts Receivable
$32,803
Sales revenue
184,137
Ending balance
$19,021
$315
197,604
17-56
Bad debts written off
Cash collected
Requirement 2:
Fillio Corporation
Statement of Cash Flows for the Year Ended 12/31/01
Operating Section under the Direct Method
Cash collected from customers:
Sales revenue
+ Decrease in gross accounts receivable
- Bad debts written off
$184,137
13,782
(315)
$197,604
(181,010)
8,330
22,459
(22,725)
(172,946)
Cash paid for marketing, etc., expenses:
Marketing, general & admin. expenses
+ Bad debt expense
- Increase in prepaid expenses
- Decrease in accrued payroll
(7,227)
238
(835)
(1,259)
(9,083)
Cash paid for interest:
Interest expense
+ Increase in accrued interest
(5,417)
33
(5,384)
Cash paid to suppliers:
Cost of sales
+ Depreciation
+ Decrease in inventory
- Decrease in trade accounts payable
Interest income on income tax refund
Cash paid for Sitco settlement:
Settlement with Sitco
+ Noncash portion of settlement with Sitco
Cash paid for other expenses:
Other expenses
+ Loss on write-off of machinery & equipment
- Decrease in other payables
- Increase in deferred financing costs
+ Increase in owners’ equity for these costs
1,048
(1,837)
1,775
(62)
(935)
227
(19)
(413)
400
(740)
Income tax refund received
Cash paid for accrued settlement costs:
- Decrease in accrued settlement
- Decrease in long-term accrued settlement
Cash flow from operations
17-57
6,731
(2,432)
(1,500)
(3,932)
$ 13,236
C17-4. Lucky Lady, Inc. (KR): Comprehensive statement of cash flows
Requirement 1:
Lucky Lady, Inc.
Statement of Cash Flows
For the Year Ended 12/31/01
Cash Flows from Operating Activities:
Net loss
+ Depreciation expense
+ Aircraft carrying value adjustment
+ Loss on sale of property, plant & equip.
(book value $2,501–cash received $684)
- Increase in net accounts receivable
- Increase in prepaid expenses
- Increase in inventories
+ Decrease in pre-opening costs
- Increase in other operating assets
+ Increase in accounts payable
+ Increase in accrued salaries & wages
+ Increase in accrued interest on LT debt
+ Increase in other accrued liabilities
+ Increase in deferred revenue
Cash flow from operations
Cash Flows from Investing Activities:
Sale of property, plant & equipment
Purchase of PP&E and cost of building
+ Increase in construction payables1
Cash flow from investment activities
1
($117,586)
8,018
68,948
1,817
(29,869)
(10,536)
(12,508)
10,677
(5,485)
9,859
7,249
43
23,758
10,784
($ 34,831)
684
($480,054)
64,548
(415,506)
($414,822)
Cash Flow from Financing Activities:
Repayment of principal in capital lease
Additional borrowing (laundry loan)
Issuance of additional common stock
Cash flow from financing activities
(1,564)
10,000
72,559
$ 80,995
Total change in cash
Cash at 12/31/00
Cash at 12/31/01
(368,658)
579,963
$211,305
Alternatively, this could be shown as a financing activity cash inflow.
17-58
Note on significant non-cash transaction: The Company entered into a
capital lease agreement and recorded an asset and a corresponding liability
for $16,987.
Property, Plant and Equipment
Beginning balance
$471,506
New capital lease
16,987 $14,751 Cost of asset sold (net book value
$2,501 + Acc. dep. $12,250)
Other new additions
X
Ending balance
$953,796
Solve for X:
$953,796 = $471,506 + $16,987 + X - $14,751
X = $480,054
Accumulated Depreciation
$21,796
Acc. depr. on asset sold
X
8,018
68,948
$86,512
Beginning balance
Depreciation expense
Carrying value adjustment
Ending balance
Solve for X:
$86,512 = $21,796 + $8,018 + $68,948 - X
X = $12,250
Capital Lease Obligation (including current maturities)
$451
Beginning balance
Repayment of principal
X
16,987
New capital lease
$15,874
Ending balance
Solve for X:
$15,874 = $451 + $16,987 - X
X = $1,564
17-59
Lucky Lady, Inc.–Alternative Approach
Statement of Cash Flows
For the Year Ended 12/31/01
Cash Flows from Operating Activities:
Net loss
+ Depreciation expense
+ Aircraft carrying value adjustment
+ Loss on sale of property, plant & equip.
(Book value $2,501 - Cash received $684)
+ Bad debt expense
- Increase in gross accounts receivable
($33,071)
- Bad debts written off
(653)
- Increase in prepaid expenses
- Increase in inventories
+ Decrease in pre-opening costs
- Increase in other operating assets
+ Increase in accounts payable
+ Increase in accrued salaries & wages
+ Increase in accrued interest on LT debt
+ Increase in other accrued liabilities
+ Increase in deferred revenue
Cash flow from operations
Cash Flows from Investing Activities:
Sale of property, plant & equipment
Purchase of PP&E and cost of building
+ Increase in construction payables
Cash flow from investment activities
Cash Flow from Financing Activities:
Repayment of principal in capital lease
Additional borrowing (laundry loan)
Issuance of additional common stock
Cash flow from financing activities
Total change in cash
Cash at 12/31/00
Cash at 12/31/01
($117,586)
8,018
68,948
1,817
3,855
(33,724)
(10,536)
(12,508)
10,677
(5,485)
9,859
7,249
43
23,758
10,784
(34,831)
684
(480,054)
64,548
(415,506)
(414,822)
(1,564)
10,000
72,559
80,995
(368,658)
579,963
$211,305
17-60
Under the alternative approach, we are merely breaking down the change in
net accounts receivable into three components which are italicized. This is
done in order to convert the indirect statement to a direct statement. Of
course, this step can be omitted.
Gross Accounts Receivable
Beginning balance
Revenue
Ending balance
$2,178
57,800
$35,249
$653
X
Bad debts written off
Cash collected
Solve for X:
$35,249 = $2,178 + $57,800 - $653 - X
X = $24,076
Bad debts written off
Allowance for Doubtful Accounts
$1,531
Beginning balance
X
3,855
Bad debt expense
$4,733
Ending balance
Solve for X:
$4,733 = $1,531 + $3,855 - X
X = $653
Note: These T-accounts may be useful when preparing the direct cash flow
statements. Note that we have to consider the change in deferred revenue to
calculate the “correct” amount of cash collected from customers.
17-61
Requirement 2:
Lucky Lady, Inc.
Direct Method
Cash Flow from Operations
Cash collected from customers:
Total revenue
- Increase in gross A/R
- Bad debts written off
+Increase in deferred revenue
$57,800
(33,071)
(653)
10,784
$34,860
Cash paid for direct operating expense (approx.):
Direct operating expense (casino + ... + airline) (39,262)
- Increase in prepaid expenses
(10,536)
- Increase in inventories
(12,508)
- Increase in other operating assets
(5,485)
+Increase in accounts payable
9,859
+Increase in accrued salaries & wages
7,249
+Increase in other accrued liabilities
23,758
(26,925)
Cash paid for SG&A expenses:
SG&A expenses
+Bad debt expense
(19,679)
3,855
(15,824)
Cash paid for hotel pre-opening expenses:
Hotel pre-opening expenses
(45,130)
+Decrease in pre-opening costs
10,677
(34,453)
Interest income
12,231
Cash paid for interest expense:
Interest expense
+ Increase in accrued interest on LT debt
(6,596)
43
Cash received from other non-operating items:
Other, net
16
+Loss on sale of PP&E
1,817
Cash flow from operations
(6,553)
1,833
($34,831)
Note: The direct approach obviously requires assumptions regarding which
operating assets and liabilities pertain to which revenue and expense items.
17-62
C17-5. Opus One, Inc. (KR): Preparation and analysis of the cash flow statement
Requirement 1:
Notes:
1) Since the company did not declare or pay any cash or stock dividends
during the year, the change in the retained earnings of $1,127,664 must be
the net income for the year.
2) The T-accounts for property and equipment and accumulated depreciation
are prepared to solve for the new acquisitions of property and equipment
during the year.
Accumulated Depreciation
$6,822,553
Acc. dep. on scrapped asset $57,107
2,265,735
$9,031,181
Balance as of 6/30/00
New acquisitions
Balance as of 6/30/01
Balance as of 6/30/00
Depreciation expense (given)
Balance as of 6/30/01
Property and Equipment
$20,637,912
1,608,943 $64,484
Orig. cost of the scrapped asset
($57,107 + $7,377)
$22,182,371
First, by crediting the accumulated depreciation T-account with the
depreciation expense for the year, we find that the accumulated depreciation
on the scrapped asset must have been $57,107 (the plug number). Since the
book value of the scrapped asset was $7,377, the original cost of the asset
must have been $64,484 ($57,107 + $7,377). This amount would have been
credited to the property and equipment T-account. The resulting plug number
of $1,608,943 must be the cost of new property and equipment acquired
during the year.
3) The change in the accumulated amortization of $24,450 must represent
the non-cash amortization expense for the year.
4) The words “deferred credits” suggest that the liability account “Other
liabilities & deferred credits” must be an operating liability rather than a
financial liability.
5) To calculate the financing cash flows from long-term debt, it is useful to
focus on the total long-term rather than split them into current and long-term
portions.
17-63
6/30/01
6/30/00 Borrowing
Long-Term Debt:
Term loan
$3,420,000
–
$3,600,000
534,475 555,455
–
Mortgage note
Total
$3,954,475 $555,455 $3,600,000
- Current installments
(681,716) (21,348)
Long-term debt (less)
$534,107
current installments $3,272,759
Repayments
($180,000)
(20,980)
($200,980)
6) Although revolving credit agreements appear as a current liability, they
are a financing liability. Consequently, they will be reflected in the financing
section of the cash flow statement.
17-64
Opus One, Inc.
Statement of Cash Flows
For the Year Ended 6/30/2001
Operating Activities:
Net income for the year
+ Amortization of goodwill
+ Depreciation expense
+ Loss on disposition of equipment
Decrease in net receivables
Decrease in inventories
Decrease in prepaid expenses
Decrease in income tax receivable
Increase in deferred tax asset
Decrease in pre-opening costs
Increase in accounts payable
Increase in accrued liabilities
Increase in other liabilities & deferred credits
Cash flow from operations
$ 1,127,664
24,450
2,265,735
7,377
1,540,275
815,162
254,183
1,500,482
(511,600)
506,721
3,102,873
768,144
763,872
$12,165,338
Investing Activities:
Purchase of property and equipment
Cash flow from investing activities
($ 1,608,943)
($ 1,608,943)
Financing Activities:
Issuance of new shares
8,998
Borrowing on term loan
3,600,000
Repayment of term loan
(180,000)
Repayment of mortgage note
(20,980)
Repayments under revolving credit agreement (13,933,009)
Cash flow from financing activities
($10,524,991)
Change in cash
Cash balance as of 6/30/00
Cash balance as of 6/30/01
17-65
$31,404
19,481
$50,885
Requirement 2:
Caveat: The analysis is handicapped by the limited amount of information
available in the problem. The learning objective of this assignment is to
enable the students to evaluate the cash flow statement rather than perform a
comprehensive analysis of the financial performance of Opus One, Inc.
The cash flow from operations (CFO) of Opus One, Inc., is almost 11 times
the net income of the company. Given the Wall Street adage that “Cash Flow
is King and Earnings Don’t Matter,” does this mean that the financial
performance of Opus One is really 11 times better than that indicated by its
net income? Let us examine the sources of the high CFO to see whether
Opus One can sustain this level of cash flows in the future.
First of all, the company’s receivables decreased by more than $1.5 million.
Roughly, the company collected that much more cash than the revenue
booked in the accrual accounting income statement. This might be good
news if the company has improved its collection efforts. Even so, this is
unlikely to happen year after year if a company is growing, i.e., collecting more
cash than the accrual revenue. Consequently, this is likely to be a temporary
phenomenon.
A second source of the higher cash flow is the drop in the level of inventory.
One possibility is that the drop is due to an unexpected sale at the end of the
year. However, this is unlikely since the company experienced a drop in the
receivables also; i.e, if there were unexpectedly large sales at the end of the
year, we might expect the accounts receivable to go up. More importantly,
inventory level provides a signal about future demand; i.e, companies are
likely to build up (decrease) inventories when they expect a surge (fall) in
demand. Therefore, another possibility is that the company saved some cash
in the current year by buying less inventory, but it might generate less cash
during the next year by selling less inventory. In any case, it is unlikely that
inventory levels can continue to decrease when companies are growing. In
fact, in the following year, the company built up almost $10 million of inventory
which resulted in a negative CFO. The main message here is that neither
cash flows nor accounting income by itself can tell the whole story. A joint
examination of the two is likely to be constructive.
A third factor is the increase in accounts payable by more than $3 million.
More credit from suppliers is not necessarily a bad sign; i.e, suppliers are
unlikely to extend credit when they believe their customers have impending
financial difficulties. However, an increase in accounts payable usually
happens when there is a buildup in the inventory level. Consequently, one
should examine why Opus One's accounts payable are increasing when its
inventory level is falling. One possibility is that the company was “forced” to
pay off its revolving credit under the current agreement (see financing cash
flow). This might have delayed the payment to the suppliers.
17-66
A fourth item is the cash received from the decrease in the income tax refund
receivable. When is it likely for a company to have an asset called income
tax refund receivable? There are two possibilities. First, the company paid
more taxes during a year when compared to what it owed the IRS based on
its actual taxable income; i.e, the actual income was less than the anticipated
income. A second possibility is that the company incurred a net loss in the
recent past, and, using the loss carryback provision, the company is
expecting to receive a tax refund. Either scenario suggests that the company
has encountered difficulties in the recent past. In fact, Opus One incurred a
net loss of almost $2.5 million during the fiscal year 2000.
Similar comments can be made on other operating assets and liabilities.
The fact that the company arranged a term loan of $3.6 million is a positive
signal. First of all, the company has convinced a creditor to lend it money.
Secondly, the loan is a long-term one, and therefore, a substantial portion of
the principal payments are unlikely to be due in the near term. The company
has paid back about 5% of the term over a 4-month period. On an annual
basis, this translates into 15% of the loan; i.e, the company has the potential
to use the term loan to finance a part of its working capital needs over the
next several years.
Collaborative Learning Case
C17-6. Best Buy Company: Analysis of financial performance from the cash flow
statement and other information
Caveat: Due to limited information available in the problem, our analysis
cannot provide a complete picture of the financial performance of the
company over the three-year period. The learning objective for this problem
is to enable the student to examine the items that cause net income to be
different from the cash flow numbers.
Requirement 1:
Comparison of earnings and operating cash flows:
The company’s net income has consistently increased over the three-year
period, from almost $82 million during the fiscal year 1998 to more than $347
million during 2000. Likewise, the cash flow from operations (CFO)
experienced year-to-year increases during this period from $450 million in
fiscal 1998 to $760 million in 2000. During this three-year period, operations
have been the primary source of the company’s cash flows.
How might an analyst interpret the company’s increase in CFO? Recall that
when operating assets increase (or decrease), they are a use of (or a source
of) operating cash flows. The opposite is true for the operating liabilities. An
17-67
examination of the operating section of the cash flow statements suggests
that Best Buy has been building receivables during the three-year period
ending 2000. In addition, inventories increased dramatically during 2000
when compared to 1999 and 1998’s decreasing inventory levels. Upon
closer examination, we see that from 1998 to 2000 Best Buy actually
experienced year-to-year inventory builds. One more important fact to note is
that the increase each year in accounts payable more than offset any
perceived cash flow deterioration resulting from an inventory build.
An important task is for the analyst to understand whether these trends
signify positive or negative news about the company. To understand the
change in inventories, let us focus on the statistics on new store openings:
Number of stores at the end of
year
Number of new stores opened
during the year
2000
357
1999
311
1998
284
46
27
12
1997
272
When retail companies such as Best Buy expand by acquiring or building
new stores, they experience a sudden demand for new working capital. This
is clearly communicated by Best Buy in its annual report.
Each new store requires working capital of approximately $4 million
for merchandise inventory (net of vendor financing), leasehold
improvements, fixtures and equipment.
Note that the words “net of vendor financing” suggests that the $4 million is
for the investment in inventory and other assets minus the credit extended
by the suppliers through accounts payable.
It is quite likely that these new stores will not yet have reached their annual
revenue projections during the first year of operations. Consequently, the
increase in accounts receivable and inventory will result in a drain on the
operating cash flows until the new stores reach their annual sales targets.
17-68
Requirement 2:
Analysis of working capital needs:
Let us try to calculate the expected increase in the working capital during
each of the three years due to new store openings:
2000
Need for working capital per new
store
$ 4,000
Number of new stores opened during
the year
46
Total working capital needed for the
new stores
$184,000
1999
$
1998
4,000
$ 4,000
27
12
$108,000
$48,000
Now, let us compare these figures with the actual change in the working
capital during the same period:
Changes in Working Capital
For the fiscal year ended
2/26/2000
Receivables
$
56,900
Merchandise inventories
137,315
Other assets
11,005
Accounts payable
(302,194)
Other liabilities
(108,829)
Accrued income taxes
(97,814)
Net decrease in the working capital
$ (303,617)
2/27/1999
36,699
(14,422)
4,251
(249,094)
(82,544)
(62,672)
$ (367,782)
$
2/28/1998
16,121
(71,271)
3,278
(147,340)
(63,950)
(33,759)
$ (296,921)
$
Note that each of the figures in the above table are taken from the operating
section of the statement of cash flows. However, their signs have been
reversed since working capital is defined as current assets (-) current
liabilities. Consequently, increases in assets and liabilities have the positive
and negative signs, respectively. The opposite is true for the decreases in
assets and liabilities.
Given the significant growth during the three-year period ended 2000 (adding
a total of 85 new stores), it is surprising that Best Buy's working capital
requirements appear to have decreased. Looking at fiscal 2000, in which 46
stores were opened, we see that working capital requirements were negative;
however, they increased by more than $64 million when compared to 1999.
This is considerable less than the $184 million that was expected based on
the working capital requirements of the new stores for 2000. Consequently,
an analyst is likely to conclude that Best Buy’s growth strategy is
conservative and can be easily financed through existing operations.
17-69
However, an analyst must carefully follow up to examine how well the new
stores are doing.
Requirement 3:
Analysis of year-to-year changes in inventory and how these changes were
financed:
During 2000, although the company added another 46 stores, their working
capital decreased about $304 million compared to the expected increase of
$184 million. This is primarily the result of increased vendor financing of
inventory.
Increase in merchandise inventory
Increase in accounts payable
% of increase in inventory financed by accounts payable
2000
$ 137,315
302,194
220%
Suppliers financed the entire growth in inventory during 2000. Similar vendor
financing was achieved in fiscal 1999 and 1998. The question the analyst will
ask is whether this type of financing is sustainable in the long run.
Fiscal 2000 was good year for Best Buy. The company’s profits increased
over 60% from 1999 (which was 164% more than fiscal 1998). Operating
cash flows indicate that the company has made substantial efforts to improve
its financial position by using vendor financing to offset increased inventory
levels in 2000. During 1999 and 1998 inventory levels decreased, which
appears to be inconsistent with operating results. That is, Best Buy
experienced tremendous growth in revenue during this period. As a result,
inventory levels would have been expected to increase in order to support
this growth. The fact that they did not indicates that management has
implemented programs to improve inventory management and control
inventory levels.
Accounts receivable experienced year-to-year increases, which is
consistent with growth in sales. However, the analyst will want to follow up
with the company to insure that the increase in receivables is due to
increased sales volume versus a change in credit policy or credit terms.
Requirement 4:
Insights from the “Investing” and “Financing” sections of the cash flow
statement.
The "Investing" section of the cash flow statement suggest that the company
has substantially increased its capital expenditures during 2000 to more than
$361 million from around $166 million and $72 million in 1999 and 1998,
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respectively. It appears that Best Buy is planning to continue its expansion
program.
Finally, let us focus on the financing cash flows. The most important issue is
how the business expansion was financed:
· In 1998 borrowings and proceeds from issuing common stock were
virtually offset by long-term debt repayments.
· In 1999 and 2000 Best Buy used cash to reduce its long-term debt and
repurchase its common stock.
Based on the above, we can conclude that Best Buy is financing its growth
through operations (that is through increased earnings, improved inventory
management and extensive use of vendor financing). An analyst may want to
ask the question “Is it smart to finance long-term needs (permanent
increases in working capital for new store openings) and business expansion
with short-term financings.”
The following are selected excerpts from the management discussion and
analysis section of the 2000 fiscal year 10-K report of the company. The
management discusses many of the issues that were brought out in our
analysis of the cash flows of Best Buy.
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Liquidity and Capital Resources Excerpts
Record financial performance enabled the Company to internally fund its business
expansion and repurchase approximately $400 million of the Company's common stock,
while maintaining its liquidity and strong financial position. Cash flow from operations
increased $98 million in fiscal 2000, to $760 million, driven by earnings growth and
continued improvement in inventory management.
Inventories at the end of fiscal 2000 were $1.2 billion, up only 13% compared with one
year ago, even with a 24% sales increase, due to faster inventory turns. The increase in
inventories was fully funded by an increase in accounts payable.
Trade receivables, mainly credit card and vendor-related receivables, increased $57
million from one year ago. The increase was primarily due to higher business volumes
resulting from a 25% increase in fourth-quarter sales and amounts due from ISP promotion
subsidies. Receivables from sales on the Company's private-label credit card are sold to
third parties, without recourse, and the Company does not bear any risk of loss with
respect to these receivables.
Accounts payable and accrued liabilities increased compared with fiscal 1999, due to
higher business volume. Accrued compensation and related liabilities increased versus
one year ago as a result of expenses associated with the expanding employee base
supporting the Company's growth.
Debt declined $30 million in fiscal 2000 due to the repayment of an $18 million note and
scheduled maturities of capital leases and other loans.
Capital spending in fiscal 2000 was $361 million, compared with $166 million and
$72 million in fiscal 1999 and fiscal 1998, respectively. The Company expanded its store
base by investing in 47 new stores and 13 remodeled or relocated stores during fiscal
2000, compared with 28 new stores and five remodeled or relocated stores in fiscal 1999,
and 13 new stores and five remodeled or relocated stores in fiscal 1998.
The Company increased its expansion program in fiscal 1999 after the initiatives to
improve operations resulted in an enhanced operating model and improved profitability.
Capital spending in fiscal 2000 also included the initial development for some of the stores
scheduled to open in fiscal 2001. Additionally, the Company expanded its corporate
facilities to support the growth of the business, the most significant investment being the
purchase of an additional office building to supplement the Company's corporate office.
The Company also continued to invest in new systems and technology to better position it
for continued growth and to generate improvements in its existing business.
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